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Ruling

Subject: GST and international brokerage

Question

Are supplies of international brokerage services you provide which facilitate the sale and purchase of shares traded on overseas exchanges GST-free under item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

Overseas trading services are made by you in association with X, which is a subsidiary of an overseas financial institution. Overseas trading services allow a customer to trade foreign equities through you.

A customer intending to carry out trading must register to do so within the terms and conditions of the arrangement. Upon doing so a customer account is opened with X. The customer is bound by the Terms and Conditions of the arrangement, in particular the customer:

§ Acknowledges that you perform the role of introducing the customer to the Agent (X)

§ Acknowledges it will be subject to the trading rules of the Agent

§ Acknowledges the Agent provides custodial services directly to the customer

§ Acknowledges that you do not accept liability for any losses incurred by the customer for any acts by the International Custodian (i.e. X)

§ Account is paid interest at X's standard rate on cash held by the customer in the X account.

X is your agent with regard to execution, clearing, settlement and custody of the overseas trading activities of customers. Due to the fact that X is providing such services to customers in Australia it is obliged to provide a Financial Services Guide (FSG) pursuant to the Corporations Act 2001. The relevant agreement ensures that you provide X's FSG to customers on behalf of X.

The X FSG sets out the relationship between X and the customer, it confirms:

§ X provides execution, clearing, settlement and custody services to customers through you

§ X is authorised to provide custodial and depository services

§ X will not receive payments from customers but will be paid by you for the financial services provided by it

§ A customer's account is maintained as a broker pursuant to an Agreement with you.

The Agreement provides that:

§ All customers receiving services pursuant to the Agreement remain customers of you

§ You enter into arrangements with customers on your own behalf

§ You shall not be deemed to be an agent of X for any purpose

§ For accounts introduced by you, X performs cashiering functions such as receipt and delivery of securities, receipt and delivery of funds owed by or to customers and the provision of custody for securities and funds

§ X shall only execute transactions in customers' accounts upon instructions from you

§ X charges fees to customers on your behalf under instructions from you

§ X deducts from the fees charged an amount as compensation for services provided to you

§ X has the power to institute legal proceedings against customers at its sole discretion.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

Reasons for decision

Summary

The supplies of international brokerage services that facilitate the sale or purchase of shares in companies incorporated overseas that are listed on an overseas exchange are GST-free under item 4 in the table in subsection 38-190(1) of the GST Act as the services are in relation to rights and the rights are for use outside of Australia.

Detailed reasoning

The supply of brokerage services to buy or sell shares in companies incorporated overseas that are listed on an overseas exchange will be GST-free under item 4 in the table in subsection 38-190(1) of the GST Act if:

§ the brokerage services are a supply in relation to rights; and

§ the rights are for use outside Australia.

Is the supply of brokerage services a supply 'in relation to rights'?

A supply of a service is in relation to rights if the service affects the ownership of a thing and the essential character or substance of that thing is of rights.

The value of the share is in the rights that are attached to it. The rights of each shareholder in relation to each class of share are usually contained in the constitutional documents of the company. The rights attaching to a share are not ordinarily thought of as a separate piece of property. A share is comprised of a bundle of rights; those rights are not separate pieces of property capable of being divided out and held separately. Whilst it is recognised that the detail of the rights that attach to shares (or stock) in companies incorporated overseas may vary, at a broad level the rights attached to a share generally consist of:

§ a right to participate in dividends and equity distributions whilst the company is a going concern;

§ a right to participate in distribution of assets on winding up; and

§ a right to vote.

The brokerage services supplied by you are services that facilitate the change in ownership of the shares. The brokerage services have a relevant connection with rights because through the acquisition or sale of the share, the recipient of the brokerage services acquires or sells the rights that are attached to the share.

Therefore, the supply of brokerage services is a supply in relation to rights.

Are the rights 'for use outside Australia'?

Under paragraph (a) in item 4 in the table in subsection 38-190(1) the rights must be for use outside Australia.

It is the intended use of the rights attached to the shares that is relevant in assessing the application of paragraph (a) of item 4 to the supply of the brokerage services to buy or sell shares.

In Travelex Ltd v Commissioner of Taxation [2010] HCA 33 at 35 (Travelex) the High Court considered whether the supply of Fijian currency by the appellant, Travelex, on the departure side of the Customs barrier at Sydney International Airport to an individual travelling to Fiji was a 'supply made in relation to rights' for the purpose of item 4 in the table in subsection 38-190(1) of the GST Act. French CJ and Hayne J noted that 'where it is evident that the currency is to be used overseas, the rights that attach to the currency are for use outside Australia.

The analysis by the High Court is also relevant to shares, in that, if it is evident that the shares are to be used overseas, the rights that are attached to the shares will also be for use outside Australia.

There could be a variety of intended uses of a share and these uses will also be considered a use of the rights attached to the share. Any or all of the following could be examples of the intended use of a share:

§ to generate an income flow or return of equity through the right to dividend or equity distributions;

§ to influence the direction of the company through the right to vote;

§ to generate a capital gain or profit (if a trader) through the on-supply of the share, and therefore the disposal of the rights attached to the share.

We consider that, if the company in which particular shares are held was incorporated in an overseas location and those shares are listed on an exchange in that overseas location, the rights attached to those shares will be for use in that overseas location. This is the case even if the holder of the shares is in Australia at the time any dividend is declared or received, or is in Australia at the time any on-sale of the shares it may make takes place.

In summary, the supply of brokerage services to buy and sell shares in companies incorporated overseas that are listed on an overseas exchange are GST-free under item 4 in the table in subsection 38-190(1) of the GST Act.